1. 25 Investments: Introduction
  2. 25 Investments: American Depository Receipt (ADR)
  3. 25 Investments: Annuity
  4. 25 Investments: Art and Collectibles
  5. 25 Investments: Bonds
  6. 25 Investments: Cash
  7. 25 Investments: Closed-End Investment Fund
  8. 25 Investments: Common Stock
  9. 25 Investments: Convertible Bonds
  10. 25 Investments: Corporate Bond
  11. 25 Investments: Futures Contract
  12. 25 Investments: Life Insurance
  13. 25 Investments: The Money Market
  14. 25 Investments: Mortgage-Backed Securities
  15. 25 Investments: Municipal Bonds
  16. 25 Investments: Mutual Funds
  17. 25 Investments: Options (Stocks)
  18. 25 Investments: Exchange-Traded Funds
  19. 25 Investments: Preferred Stock
  20. 25 Investments: Private Equity
  21. 25 Investments: Real Estate & Property
  22. 25 Investments: Real Estate Investment Trusts (REITs)
  23. 25 Investments: U.S. Treasury Securities
  24. 25 Investments: Unit Investment Trusts (UITs)
  25. 25 Investments: Venture Capital
  26. 25 Investments: Zero-Coupon Securities
  27. 25 Investments: Conclusion

Investors buy annuities from insurance companies to ensure they have enough income to live in retirement.  An annuity represents a series of fixed-amount payments paid at regular intervals over time.  An investor receives these payments in exchange for contributing a lump sum, upfront payment to the insurance company.  Annuity contracts can last the entire life of the policy holder.  Because of this, they offer protection against longevity, or outliving your investments.   Payouts don’t generally increase because of inflation, but certain contracts do offer some inflation protection. 

There are several types of annuities.  Deferred annuities are just that – payments are deferred until a future date.  In exchange for this deferral, payments in the future are likely to be higher than immediate annuities where payments start soon after an investor buys them for an upfront lump sum.  Variable annuities combine insurance and investing where future payouts are based off how the underlying investments perform.  These can be returns earned from index-based investments, such as the S&P 500, or even commodity-based indexes.  They can also offer some type of downside protection should stock market returns fall below a certain base level and also have a death benefit   

 

Objectives and Risks

 

Annuities can be appealing to investors worried about more uncertain stock market returns.  Those with family histories of longevity could also benefit by the lifetime payouts.  Additionally, it lets investors essentially inherit the balance sheet of a large insurance company, and government-related entities can provide backing in the rare case that the insurance company goes out of business.

 

Annuity contract terms are rather complicated, and insurance companies can at times change the terms of original contracts entered into.  Many have tax deferral benefits where gains accrue without tax consequences and until payouts or withdrawals start.

 

 

How to Buy or Sell It

 

Insurance brokers generally control the market for individual investors to buy annuities.  They cannot be sold, but they can be redeemed with an insurance company.  Early redemption/surrender fees are usually onerous but decrease the longer an annuity is held.

 

 

Strengths

 

Annuities offer downside protection in a declining stock market environment.  Annual returns are much more fixed, and even come with some level of guarantees, or fixed returns regardless of how financial markets perform.

They offer one of the best offsets to longevity risk, or the risk an individual might outlive his or her investments.

Insurance offers pooled risk that helps individual investors.

 

Weaknesses

 

Variable annuities offer less downside market protection

Annuity contracts are complicated and carry what can be significant surrender fees.

If you die early, then you will not get back the full value of your investment.  It is the downside to longevity risk where the insurance company benefits when the policy holder doesn’t live that long.

 

Key Considerations

 

Liquidity:  Medium

Historical Returns:  Medium

Inflation Protection:  Low


25 Investments: Art and Collectibles
Related Articles
  1. Retirement

    Annuities: How To Find The Right One For You

    Fixed, variable and indexed annuities offer different features. Find out which one fits your needs.
  2. Retirement

    Are Annuities Retirement-Only Investments?

    Learn more about why annuities are generally purchased and the way that they can positively and negatively affect an individual preparing for retirement.
  3. Retirement

    Retirement Tips: Choose the Best Annuity Provider

    It pays to get the best advice if you are thinking of putting your money into one of these complicated investments.
  4. Financial Advisor

    Advising FAs: Explaining Annuities to a Client

    Conceptually speaking, annuities can be thought of as a reverse form of life insurance.
  5. Retirement

    How a Fixed Annuity Works After Retirement

    These popular investments can provide a steady stream of income during your retirement years. Here are the details.
  6. Investing

    DIY Annuities: What You Need to Know

    Annuities are attractive because they can give you a stream of income, but they can be tricky to buy.
  7. Retirement

    Why Are Annuities Important for Retirement?

    Understand how annuities work, and identify the benefits they provide for retirement, the most salient being a guaranteed income stream for life.
  8. Retirement

    How a Variable Annuity Works After Retirement

    These investments can provide extra income after you retire. Here’s a guide to when and how you will receive the payout.
  9. Retirement

    When Annuities Are the Wrong Investment

    Understand how annuities provide several unique benefits, but many drawbacks as well, and identify the situations where they are not the best investment.
  10. Retirement

    Who Benefits From Retirement Annuities

    Annuities guarantee some degree of fixed income in retirement. But is the security worth the fees and less favorable tax treatment? How to decide.
Frequently Asked Questions
  1. Who are Target's (TGT) main competitors?

    Learn more about the discount retailer Target and its competitors. Find out some of the things discount retailers do to increase ...
  2. Why would a company issue preference shares instead of common shares?

    Learn about some reasons corporations might issue preference shares and why investors might value them more than common shares.
  3. What are the Advantages of Ordinary Shares?

    Dividends and ownership rights are two advantages of investing in ordinary shares.
  4. What is real estate underwriting?

    See how underwriters for major lenders scrutinize real estate loans and manage their risk, and learn the origin of the term ...
Trading Center